Restoration Hardware Holdings, Inc. (RH) Form 10-Q Summary
Reporting period: Three months ended May 4, 2013, compared with the three months ended April 28, 2012. The filing was signed June 17, 2013. The request metadata identifies “2012 Q1,” but the filing itself is for fiscal 2013 first quarter.
Business Context
RH is a luxury home furnishings retailer selling furniture, lighting, textiles, bathware, décor, outdoor products, and children’s furnishings through stores, catalogs, and websites. As of May 4, 2013, it operated 70 retail stores and 14 outlet stores in the United States and Canada. The company reported one operating segment.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenues | $301.3 million | $217.9 million | Up 38.3% |
| Gross profit | $101.9 million | $75.3 million | Up 35.4% |
| Gross margin | 33.8% | 34.5% | Down 0.7 percentage points |
| Operating income (loss) | $0.5 million | $(2.1) million | Improved |
| Net income (loss) | $(0.2) million | $(3.7) million | Improved |
| Adjusted net income (loss) | $2.3 million | $(1.3) million | Improved |
| Net cash used in operating activities | $(19.6) million | $(9.0) million | Higher use of cash |
| Capital expenditures | $9.7 million | $6.2 million | Increased |
Stores revenue increased 38.9% to $159.3 million, while direct revenue from catalogs and websites increased 37.6% to $142.0 million. Comparable retail-store sales increased 41%. Furniture revenue was $171.4 million and non-furniture revenue was $130.0 million.
Selling, general and administrative expense increased 31.0% to $101.4 million, but declined to 33.6% of revenue from 35.5% in the prior-year quarter. Excluding specified one-time and non-cash items, SG&A was 32.3% of revenue.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $9.7 million at May 4, 2013, compared with $8.4 million at February 2, 2013.
- Merchandise inventories were $365.7 million, up from $353.3 million at fiscal year-end.
- Total assets were $859.6 million and total liabilities were $404.6 million.
- Borrowings under the revolving credit facility were $114.0 million, at a weighted-average interest rate of 2.74%.
- Undrawn borrowing availability was $138.5 million, with $20.2 million of outstanding letters of credit.
- The revolving facility matures August 3, 2016; the company was in compliance with all debt covenants.
- Management stated that expected operating cash flow and available borrowing capacity should satisfy working-capital needs, planned capital expenditures, and debt payments for at least the next 12 to 24 months.
Material Changes and Unusual Items
- Revenue growth reflected favorable customer response to expanded and new merchandise categories, as well as strong comparable-store performance.
- Gross margin declined because of product mix, strategic pricing on new products, and higher freight costs associated with increased furniture sales. Occupancy-cost leverage partly offset these pressures.
- Q1 2013 SG&A included a $3.3 million non-cash compensation charge related to performance-based vesting of shares issued to Gary Friedman and Carlos Alberini, plus $0.8 million of secondary-offering costs.
- The company expected to record an additional $26.5 million non-cash compensation charge in Q2 2013 when remaining performance-based shares vested. No further expense was expected for those awards after that charge.
- Interest expense fell to $0.8 million from $1.6 million, primarily because the term loan was repaid in November 2012 and average borrowings declined.
- Operating cash flow was pressured by a $44.3 million increase in prepaid expenses, primarily catalog costs, and a $12.4 million inventory increase for the spring and outdoor selling seasons.
- Fiscal 2013 planned capital expenditures were approximately $95 million to $100 million, primarily for Full Line Design Galleries and infrastructure.
- The company released a $57.2 million U.S. valuation allowance against deferred tax assets in the fourth quarter of fiscal 2012 after achieving cumulative profitability; the Q1 2013 effective tax rate was 51.06%.
- A proposed lease-accounting standard could significantly affect future financial statements, but the filing states that its impact could not yet be determined.
Outlook, Risks, and Contingencies
Management expects continued investment in store expansion, supply-chain infrastructure, and information technology. The filing does not provide formal quarterly or annual revenue or earnings guidance.
Key risks include dependence on discretionary consumer spending, execution of store and merchandise expansion, inventory and catalog-cost requirements, variable-rate debt, freight and product-margin pressure, lease obligations, litigation, product liability, intellectual-property and employment claims, and the possibility that actual results will differ from forward-looking expectations. The company reported no material off-balance-sheet arrangements and no material changes to contractual obligations from its most recent Form 10-K.
Management concluded that disclosure controls and procedures were effective as of May 4, 2013, with no material change in internal control over financial reporting during the quarter.
Investor Verification Items
- Confirm the filing period: the document is for Q1 fiscal 2013, not Q1 2012.
- Assess whether strong 41% comparable-store growth was sustainable and how much was driven by new categories or promotional pricing.
- Monitor the 0.7-point gross-margin decline, furniture mix, freight costs, and strategic pricing.
- Incorporate the expected $26.5 million Q2 non-cash compensation charge when evaluating reported earnings.
- Review working-capital intensity, particularly inventory and prepaid catalog costs, and the resulting reliance on the revolving credit facility.
- Compare planned fiscal 2013 capital expenditures of $95 million to $100 million with operating cash generation and borrowing capacity.
- Review debt availability, borrowing-base restrictions, letters of credit, and covenant headroom.
- Evaluate the realizability of deferred tax assets and the effect of the released valuation allowance on future tax rates.